Elasticities Flashcards
(39 cards)
What is XED
Cross elasticity of demand
What does XED do
Measures how the quantity of good A sold changes in response to the price of good B changing
How do you calculate XED
%🔺Q demanded of good A
/
%🔺P of good B
What does an XED of 0> mean (smaller than 0)
Complementary goods, as A increases in demand, price of B decreases
What does at XED of 0 mean
The goods are unrelated, increase in Demand for good A does not affect he price of good B
What does an XED 0< mean (more than 0)
Substitute goods, as demand for A increases, the price of good B decreases
What is PED
Price elasticity of demand
What does PED measure
How the quantity demanded of a good changes in response to its change in price
What is the equation for PED
%🔺Q demanded
/
%🔺 price
What does a PED of 0 mean
Perfectly inelastic relationship, demand doesn’t change regardless of the price change
What does a PED of 0-1 mean
Price inelastic demand - demand changes less than proportionately to price % change
What does PED of 1 mean
Unitary elastic - as price changes, quantity demanded changes in proportion
What does a PED of 1< mean
Elastic demand - as price changes, the demand for the good changes more than proportionately
What does a PED of infinity mean
Perfectly elastic - the good will only sell at one price
What should a firm do to a product that has PED 0-1
Increase the price as people still buy so the area under the graph will be larger (more revenue)
What should a firm with PED 1< do
Lower their price so that demand increases more than proportionately so that revenue is maximised (bigger area under the graph)
What should a firm do if their good has a PED of 1
It is unitary elastic, keep the price as it is optimal
What is YED
Income elasticity of demand
What does YED measure
How the quantity demanded of a good changes in response to a consumers income changing
How do you calculate YED
%🔺Q demanded
/
%🔺 income
What does a YED 0> mean (smaller than 0)
Inferior good
What is an inferior good
As income increases, demand decreases
What does a YED of 0 mean
Income has no effect on quantity demanded
What does a YED of 0< mean (more than 0)
It is a normal good
